Net Present Value Maximization and Imperfections in the Loan Market: A Note

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Discussion Paper

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There seems to be some confusion in the literature whether or not imperfections in the lending-borrowing market, and in particular, differences in lending and borrowing rates, would destroy shareholder unanimity. The purpose of this note is to show that imperfections in this market are not really relevant to stockholder agreement concerning the optimality of the net present value rule. To do this, the paper uses a new criterion guaranteeing unanimity and which basically only requires that investors are sufficiently competitive, i.e., spanning or the notion of firm competition recently proposed by L. Makowiski [9] generally turn out to be unnecessary for shareholder agreement. In Section 1 a version of the state preference model and some of its properties which are well know, are quickly reviewed. Section 2 deals with the unanimity issue and, as an illustration of the findings, the certainty case is considered in some detail in Section 3.

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